Presented by Ph.D Kwang-Ho Lee
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- Presented by Ph.D Kwang-Ho Lee I. IMPORTANCE OF INTERNATIOAL TAX SYSTEM II. GENERAL ASPECTS OF TAX TREATY III. STRUCTURE OF THE OECD MODEL IV. MAIN DIFFERENCES BETWEEN THE OECD AND UN MODELS V. FURTHER STUDIES ON IMPORTANT ARTICLES I. IMPORTANCE OF INTERNATIOAL TAX SYSTEM z With the advance of globalization , the world economy has been integrating as a single market MNEs has been expanding their territories in the world economy International movement of growth factors such as capital, technology and enterprises as well as goods and service has been highly increasing. * World FDI Inward Flows: U$ 55.2bil. (1980) → U$ 201.5bil. (1990) → U$ 1.3tri.(2006) z Globalization has affected on the environment of tax policy and systems as well as on the other areas. I. IMPORTANCE OF INTERNATIOAL TAX SYSTEM The international characteristics of tax policy has been increased with the so called “globalization” In the past the tax policy had been regarded as a typical domestic policy but no longer with globalization A tax policy of a country might result in spill-over effects on the economy of other countries z International tax competition has been emerged as one of main issues in the world tax area Competitively since the second half of 1970s main countries have been decreasing the tax rates of corporate and individual income tax. I. IMPORTANCE OF INTERNATIOAL TAX SYSTEM z Ideally the single tax system with single jurisdiction worldwide could resolve manyyp problems resulted from different tax systems with different jurisdictions. But in the reality each country has different tax system because it is related to the sovereignty of each country z In this situation each government in the world has been facing opportu nities and challenges to attract investment and human resources with high expertise to develop its economy The tax should not be obstacles for the promotion of international economic activities. I. IMPORTANCE OF INTERNATIOAL TAX SYSTEM z Risk of the double taxation on the foreign income without the relief system of double taxation Residence country has right to tax on world wide basis of the resident Source country has right to primarily tax on the source ifthincome of the non-residen t z Risk of the excessive taxation on the foreign income Domestic tax law of most countries usually impose high withholding tax rates on the passive income of non- resident without tax treaties I. IMPORTANCE OF INTERNATIOAL TAX SYSTEM z Different tax system of each country might provide rooms for tax avoidances MNEs could transfer the tax income to the region with lower tax rates by global transactions network Without international tax cooperation it’s hard to find appropritiate oversea tax i ncome z International tax cooperation and the vast networks of tax treaties have been gggpaining importance to support cross-border economic transactions to prevent from tax avoidance with thems. I. IMPORTANCE OF INTERNATIOAL TAX SYSTEM z Tax treaty is central parts of international tax system in which include; RliffhRelief of the dou ble taxat ion Limited tax rates on the investment income of non- resident such as dividends, interests and royalties Transfer ppgricing Mutual agreement as a way to settle the international tax disputes Exchange of tax information In ternati ona l t ax coll ec tion coopera tion: I. IMPORTANCE OF INTERNATIOAL TAX SYSTEM z Other tools of internal taxation system Controlled-Foreign Corporations(CFCs) Thin Capitalization Treaty shopping etc II. GENERAL ASPECTS OF TAX TREATIES HISTORICAL DEVELOPMENT OF TAX TREATY z Long history back to 1890s z Expanded networks post WW II z OEEC + OECD: 1956 study int’l double taxation 1963 draft Model Tax Convention 1977 Model 1992 Model (loose-leaf to facilitate updates) updates ‘94, ‘95, ‘97, 2000, 2003, 2005, 2008 z UN Manual 1979 + Model 1980 Updated 2001 II. GENERAL ASPECTS OF TAX TREATIES CHARATERISTICS OF TAX TREATIES z Mostly bilateral international treaties z Incorporated into domestic law z Generally follow the structure of the OECD Model z Variations to take account of requirements of the contracting countries z Not powered to generate the tax rights but to limit that of the contracting countries z Vas t net work of t ax t reati es i n world : 2800 II. GENERAL ASPECTS OF TAX TREATIES CHARATERISTICS OF TAX TREATIES Tax or Not Tax Law Tax Treaty Results Tax Yes Tax No Tax No Tax No Tax Yes Tax No TYTax Yes TYTax Yes TYTax Yes II. GENERAL ASPECTS OF TAX TREATIES PRIORITY OF APPLICAION OF TAX TREATIES z KOREA, JAPAN, FRANCE Constitution > Tax Treaty > Tax Law z USAU.S.A Constitution > Tax Treaty = Federal Law z U.K. Constitution > Tax Law > Tax Treaty II. GENERAL ASPECTS OF TAX TREATIES Influential Organizations: OECD & UN III. Structure of the OECD Model z OECD Model Convention has seven chapters: Chapter I Scope Of Convention(1-2) Chapter II Definitions(3-5) Chapter III Taxation Of Income(6-21) Chapter IV Taxation Of Capital(22) Chapter V Methods Of Elimination Of Double Taxation(23) Chapter VI Spp(ecial Provisions(24-29) Chapter VII Final Provisions(30-31) OECD MODEL: SCOPE CHAPTER 1 (ARTICLES 1 ––2)2) 1. To whom does the treaty apply? To residents of the contracting states 2. Taxes covered Taxes on income Taxes on capital Taxes of central government and political subdivisions List of taxes Replacement and new taxes DEFINITIONS CHAPTER II (ART. 3, 4 & 5) 3. General definitions Person Comppyany Enterprise Enterprise of a contracting state International traffic Competent authority National Business Rule for undefined terms DEFINITIONS CHAPTER II (ART. 3, 4 & 5) 4. Resident Based on domestic law Tie breaker rules for dual resident individuals and non-idiidlindividuals 5. Permanent establishment Fixed place of business Construction longer than 12 months Activities deemed not to be P.E Dependent agent with power to contract TAXATION OF INCOME CHAPTER III (ART. 6 – 21) 6. Income from immovable property Unrestricted taxation by source country allowe d(OECD, UN) 7. Business profits Taxation of net profits by source country allowed to the extent that attributable to a permanent establishment therein Force of attractions(()UN) 8. Income from shipping, waterways transport and air transport Exclusive taxation by the country where the place of effective management is located TAXATION OF INCOME CHAPTER III (ART. 6 –21) 9. Associated enterprises Right to adjust transfer prices CdidjbhCorresponding adjustment by other state 10. Dividends Taxation by source country limited to a certain percentage 5% if the beneficial owner is a company(25%treshold) 15% in all other cases Dividends connected with PE applied by Art. 7 11. Interest Taxation by source country limited to a certain ppg(ercentage (less than 10%) Interests connected with PE applied by Art. 7 TAXATION OF INCOME CHAPTER III (ART. 6 – 21) 12. Royalties Exclusive taxation by the country of residence Payments for the use of, or the right to use industrial, commercial, or scientific equipment was deleted(1992) Roy alties connected with PE applied by Art. 7 13. Capital gains TtibTaxation by source coun tliitdtitry limited to gains on immovable property and business assets of a permanent establishment Taxation by source country on gains from alienation of immovable property shares or participation shares Taxation by resident country on others 14. Independent personal services [Deleted in 2000 update, now covered under article 7] TAXATION OF INCOME CHAPTER III (ART. 6 –21) 15. Income from employment Taxation of employment income by source country biiflifbut exemption if employee is present for less than 183 days and the employer is non- resident with no PE 16. Directors’ fees Taxation by country of residence of company 17. Artistes and sportsmen Taxation by source country is allowed Taxation to the income accrue to another person TAXATION OF INCOME CHAPTER III (ART. 6 – 21) 18. Pensions EliExclusive taxa tion btfidby country of residence Pension under social security system shall be tbllithtaxable only in the source coun t(try(UN) 19. Government service Exclusive taxation by country for which the services are rendered (exception for nationals and persons who are already residents of the ooesae)ther state): TAXATION OF INCOME CHAPTER III (ART. 6 – 21) 20. Students PtftidtftdtPayments from outside country of study not taxable there 21. Other income Exclusive taxation by country of residence except if income relates to a P.E. 22.Capital Source country taxation allowed for Immovable property & business assets of a permanent establishment or fixed base Special rule for shipping: place of effective management ELIMINATION OF DOUBLE TAXATION CHAPTER V (ARTICLE 23) 23.Methods for elimination of double taxation Two alternative methods: Exemption method (art. 23 a) Credit method (art. 23 b) Exemption method Full exemption Exemption with progress Credit method Full credit Ordinary credit Indirect tax credit Tax sparing credit SPECIAL PROVISIONS CHAPTER VI (ART. 24 –29) 24. Non-discrimination Non-discrimination on the base of nationals, PE or expenses-dddeduc tions 25. Mutual aggpreement procedure Present the case within 3 years from the first notification of the action resulting in taxation not accordance with the provisions of the Convention 26. Exchange of information For carrying out the Convention or domestic tax laws concerning taxes of every kind Confidential treatment : disclose only to persons or authorities(including courts) involved in the assessment, collection or appeal of tax and in the case of court rulings. SPECIAL PROVISIONS CHAPTER VI (ART. 24 –29) 27. Assistance in the collection of taxes(2003) No restriction by Articles 1 & 2 Only in the OECD Model 28. Members of diplomatic missions and consular posts 29. Territorial extension • No same article in the UN Model FINAL PROVISIONS CHAPTER VII (ARTICLES 30 – 31) 30. EifEntry into force of fh the conventi on Date of entry into force Date of effect 31.